**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thequarterly period ended December 31, 2002**

 

**Commission File No. 1-13453**

 

| **TODHUNTER INTERNATIONAL, INC.**                                                  |
|------------------------------------------------------------------------------------|
| (Exact  name of registrant as specified in its charter)                            |
|                                                                               |   |   |
| **DELAWARE**                                                                       |   | **59-1284057** |
| (State  or other jurisdiction of  incorporation or organization)                   |   | IRS  Employer Identification No. |
|                                                                               |   |   |
|                                                                               |   |   |
| **222 Lakeview Avenue, Suite 1500, West Palm Beach, FL**                           |   | **33401** |
| (Address  of principal executive offices)                                          |   | (Zip  Code) |
|                                                                               |   |   |
| Registrant’s telephone  number, including area code:  **(561) 655-8977** |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months, and (2) has been subject to such filing requirements for the past 90days.

 

Yes   ý                  No   o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act).

 

Yes   o                  No   ý

 

The number of sharesoutstanding of registrant’s Common Stock, $.01 par value per share, as ofFebruary 7, 2003 was 5,572,334.

 

----

 

TODHUNTER INTERNATIONAL, INC.

 

INDEX

 
| PART I                                                                 | FINANCIAL INFORMATION |
|------------------------------------------------------------------------|-----------------------|
|                                                                   |                  |
|                                                                   | Item 1                | Financial Statements |
|                                                                   |                  |   |
|                                                                   |                  | Consolidated Balance Sheets  -  December 31, 2002 and September 30, 2002 |
|                                                                   |                  |   |
|                                                                   |                  | Consolidated  Statements of Income -  Three Months Ended December 31, 2002 and 2001 |
|                                                                   |                  |   |
|                                                                   |                  | Consolidated Statements  of Cash Flows -  Three Months Ended December 31, 2002 and 2001 |
|                                                                   |                  |   |
|                                                                   |                  | Notes to  Consolidated Financial Statements |
|                                                                   |                  |   |   |
|                                                                   | Item  2               | Management’s  Discussion and Analysis of Financial Condition  and Results of Operations |
|                                                                   |                  |   |
|                                                                   | Item  3               | Quantitative  and Qualitative Disclosures About Market Risk |
|                                                                   |                  |   |   |
|                                                                   | Item 4                | Controls and Procedures |
|                                                                   |                  |   |   |
| PART II                                                                | OTHER INFORMATION     |
|                                                                   |                  |   |   |
|                                                                   | Item 1                | Legal Proceedings |   |
|                                                                   |                  |   |   |
|                                                                   | Item 2                | Changes in Securities and  Use of Proceeds |   |
|                                                                   |                  |   |   |
|                                                                   | Item 3                | Defaults Upon Senior  Securities |   |
|                                                                   |                  |   |   |
|                                                                   | Item 4                | Submission of Matters to a  Vote of Security Holders |   |
|                                                                   |                  |   |   |
|                                                                   | Item 5                | Other Information |   |
|                                                                   |                  |   |   |
|                                                                   | Item 6                | Exhibits and  Reports on Form 8-K |   |
|                                                                   |                  |   |   |
|                                                                   | Signatures            |
|                                                                   |                  |   |   |
| * Item is omitted because  answer is negative or item is inapplicable. |

 

----

 

**PART I - FINANCIAL INFORMATION**

**Item 1.    Financial Statements**

 

TODHUNTERINTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

 
|                                                       |   | **December 31,  2002** |        | **September 30,  2002** |   |
|------------------------------------------------------------|--------|------------------------|-------------|-------------------------|--------|
|                                                       |   | **(Unaudited)**        |        | *****                   |   |
| ASSETS                                                     |   |                   |        |                    |   |
|                                                       |   |                   |        |                    |   |
| CURRENT  ASSETS                                            |   |                   |        |                    |   |
| Cash  and cash equivalents                                 |   | $                      | 13,899,753  |                    | $      | 13,946,736 |   |
| Short-term  investments                                    |   | 3,299,033              |        | 3,397,033               |   |
| Trade  receivables                                         |   | 10,711,008             |        | 13,505,737              |   |
| Other  receivables                                         |   | 2,038,604              |        | 2,696,743               |   |
| Inventories                                                |   | 27,048,637             |        | 27,854,925              |   |
| Notes  receivable, current maturities                      |   | 128,321                |        | 118,165                 |   |
| Deferred  income taxes                                     |   | 2,078,250              |        | 1,992,000               |   |
| Other  current assets                                      |   | 2,977,065              |        | 3,078,437               |   |
| Total  current assets                                      |   | 62,180,671             |        | 66,589,776              |   |
|                                                       |   |                   |        |                    |   |
| LONG-TERM  INVESTMENTS AND NOTES RECEIVABLE                |   |                   |        |                    |   |
| Investments  in and advances to equity investees           |   | 1,951,917              |        | 1,584,628               |   |
| Notes  receivable from affiliates, less current maturities |   | 3,765,392              |        | 3,774,773               |   |
| Notes  receivable, less current maturities                 |   | 564,731                |        | 584,687                 |   |
|                                                       |   | 6,282,040              |        | 5,944,088               |   |
|                                                       |   |                   |        |                    |   |
| PROPERTY  AND EQUIPMENT                                    |   | 91,100,798             |        | 89,775,329              |   |
| Less  accumulated depreciation                             |   | 48,765,412             |        | 47,590,112              |   |
|                                                       |   | 42,335,386             |        | 42,185,217              |   |
|                                                       |   |                   |        |                    |   |
| GOODWILL,  less accumulated amortization                   |   | 20,524,404             |        | 20,524,404              |   |
| AMORTIZED  INTANGIBLE ASSETS                               |   | 1,955,130              |        | 2,040,181               |   |
| OTHER  ASSETS                                              |   | 720,654                |        | 598,838                 |   |
|                                                       |   | $                      | 133,998,285 |                    | $      | 137,882,504 |   |

 

----

*From audited financial statements.

See Notes to ConsolidatedFinancial Statements.

 

1

----

 

TODHUNTERINTERNATIONAL, INC.

CONSOLIDATEDBALANCE SHEETS

 
|                                                                                                                                                       |   | **December 31,  2002** |        | **September 30,  2002** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|-------------|-------------------------|--------|
|                                                                                                                                                       |   | **(Unaudited)**        |        | *****                   |   |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                                                 |   |                   |        |                    |   |
|                                                                                                                                                       |   |                   |        |                    |   |
| CURRENT  LIABILITIES                                                                                                                                       |   |                   |        |                    |   |
| Current  maturities of long-term debt                                                                                                                      |   | $                      | 4,000,000   |                    | $      | 4,000,000 |   |
| Accounts  payable                                                                                                                                          |   | 4,667,431              |        | 4,051,379               |   |
| Accrued  expenses                                                                                                                                          |   | 2,092,458              |        | 3,223,293               |   |
| Total  current liabilities                                                                                                                                 |   | 10,759,889             |        | 11,274,672              |   |
|                                                                                                                                                       |   |                   |        |                    |   |
| LONG-TERM  DEBT, less current maturities                                                                                                                   |   | 50,661,133             |        | 53,017,009              |   |
|                                                                                                                                                       |   |                   |        |                    |   |
| DEFERRED  INCOME TAXES                                                                                                                                     |   | 4,735,250              |        | 4,710,000               |   |
|                                                                                                                                                       |   |                   |        |                    |   |
| OTHER  LIABILITIES                                                                                                                                         |   | 2,248,855              |        | 1,811,459               |   |
|                                                                                                                                                       |   | 68,405,127             |        | 70,813,140              |   |
|                                                                                                                                                       |   |                   |        |                    |   |
| STOCKHOLDERS’  EQUITY                                                                                                                                 |   |                   |        |                    |   |
| Preferred  stock, par value $.01 per share; authorized 2,500,000 shares; no shares  issued                                                                 |   | —                 |        | —                  |   |
| Common  stock, par value $.01 per share; authorized 10,000,000 shares; issued 5,671,434  shares December 31, 2002, and 5,669,434 shares September 30, 2002 |   | 56,714                 |        | 56,694                  |   |
| Additional  paid-in capital                                                                                                                                |   | 18,680,679             |        | 18,664,449              |   |
| Retained  earnings                                                                                                                                         |   | 47,593,545             |        | 49,086,001              |   |
|                                                                                                                                                       |   | 66,330,938             |        | 68,807,144              |   |
| Less  cost of 99,200 shares of treasury stock                                                                                                              |   | (737,780               | )           | (737,780                | )      |
|                                                                                                                                                       |   | 65,593,158             |        | 67,069,364              |   |
|                                                                                                                                                       |   | $                      | 133,998,285 |                    | $      | 137,882,504 |   |

 

----

*From audited financialstatements.

See Notes to ConsolidatedFinancial Statements.

 

2

----

 

TODHUNTERINTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OFINCOME

(Unaudited)

 
|                                          |   | **Three Months Ended December 31,** |       |
|-----------------------------------------------|--------|-------------------------------------|------------|
|                                          |   | **2002**                            |       | **2001** |   |
|                                          |   |                                |       |   |   |
| Sales                                         |   | $                                   | 28,337,184 |   | $ | 31,961,935 |   |
| Less  excise taxes                            |   | 7,372,705                           |       | 8,108,156 |   |
| Net  sales                                    |   | 20,964,479                          |       | 23,853,779 |   |
|                                          |   |                                |       |   |   |
| Cost  of goods sold                           |   | 15,380,241                          |       | 16,297,690 |   |
| Gross  profit                                 |   | 5,584,238                           |       | 7,556,089 |   |
|                                          |   |                                |       |   |   |
| Selling,  general and administrative expenses |   | 5,508,973                           |       | 5,070,151 |   |
| Operating  income                             |   | 75,265                              |       | 2,485,938 |   |
|                                          |   |                                |       |   |   |
| Other  income (expense):                      |   |                                |       |   |   |
| Interest  income                              |   | 132,661                             |       | 224,163 |   |
| Interest  expense                             |   | (724,903                            | )          | (792,727 | ) |
| Equity  in income of equity investees         |   | 93,288                              |       | 74,231 |   |
| Other,  net                                   |   | (1,397,030                          | )          | 38,449 |   |
|                                          |   | (1,895,984                          | )          | (455,884 | ) |
|                                          |   |                                |       |   |   |
| Income  (loss) before income taxes            |   | (1,820,719                          | )          | 2,030,054 |   |
|                                          |   |                                |       |   |   |
| Income  tax expense (benefit):                |   |                                |       |   |   |
| Current                                       |   | (267,263                            | )          | 537,431 |   |
| Deferred                                      |   | (61,000                             | )          | 2,500 |   |
|                                          |   | (328,263                            | )     | 539,931 |   |
|                                          |   |                                |       |   |   |
| Net  Income (loss)                            |   | $                                   | (1,492,456 | ) | $ | 1,490,123 |   |
|                                          |   |                                |       |   |   |
| Earnings (loss) per common share:             |   |                                |       |   |   |
| Basic                                         |   | $                                   | (0.27      | ) | $ | 0.27 |   |
| Diluted                                       |   | $                                   | (0.27      | ) | $ | 0.27 |   |
|                                          |   |                                |       |   |   |
| Common  shares and equivalents outstanding:   |   |                                |       |   |   |
| Basic                                         |   | 5,571,125                           |       | 5,513,734 |   |
| Diluted                                       |   | 5,667,014                           |       | 5,551,670 |   |

 

See Notes to ConsolidatedFinancial Statements.

 

3

----

 

TODHUNTER INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OFCASH FLOWS

(Unaudited)

 
|                                                                                             |   | **Three Months Ended December 31,** |       |
|--------------------------------------------------------------------------------------------------|--------|-------------------------------------|------------|
|                                                                                             |   | **2002**                            |       | **2001** |   |
|                                                                                             |   |                                |       |   |   |
| CASH  FLOWS FROM OPERATING ACTIVITIES                                                            |   |                                |       |   |   |
| Net  income (loss)                                                                               |   | $                                   | (1,492,456 | ) | $ | 1,490,123 |   |
| Adjustments  to reconcile net income (loss)  to net  cash provided by operating activities: |   |                                |       |   |   |
| Depreciation                                                                                     |   | 1,273,222                           |       | 1,266,812 |   |
| Amortization                                                                                     |   | 85,050                              |       | 97,550 |   |
| (Gain)  on sale of property and equipment                                                        |   | (15,636                             | )          | (22,531 | ) |
| Equity  in (income) of equity investees                                                          |   | (93,288                             | )          | (74,231 | ) |
| Deferred  income taxes                                                                           |   | (61,000                             | )          | 2,500 |   |
|                                                                                             |   |                                |       |   |   |
| Changes  in assets and liabilities:                                                              |   |                                |       |   |   |
| (Increase)  decrease in:                                                                         |   |                                |       |   |   |
| Receivables                                                                                      |   | 3,452,868                           |       | 3,376,547 |   |
| Inventories                                                                                      |   | 806,288                             |       | 1,964,339 |   |
| Other  current assets                                                                            |   | 101,372                             |       | 1,554,941 |   |
| Increase  (decrease) in:                                                                         |   |                                |       |   |   |
| Accounts  payable                                                                                |   | 616,052                             |       | (777,729 | ) |
| Accrued  expenses                                                                                |   | (1,130,835                          | )          | (515,435 | ) |
| Other  liabilities                                                                               |   | (437,396                            | )          | 48,830 |   |
| Net  cash provided by operating activities                                                       |   | 3,979,033                           |       | 8,411,716 |   |
|                                                                                             |   |                                |       |   |   |
| CASH  FLOWS FROM INVESTING ACTIVITIES                                                            |   |                                |       |   |   |
| Proceeds  from sale of property and equipment                                                    |   | 19,280                              |       | 27,313 |   |
| Principal  payments received on notes receivable                                                 |   | 19,181                              |       | 28,764 |   |
| Purchase  of property and equipment                                                              |   | (1,427,035                          | )          | (2,173,608 | ) |
| Disbursements  for notes receivable                                                              |   | —                              |       | (286,797 | ) |
| Purchase  of short-term investments                                                              |   | —                              |       | (1,954,441 | ) |
| Redemption  of short-term investments                                                            |   | 98,000                              |       | — |   |
| Investments  in and advances to equity investees                                                 |   | (274,001                            | )          | — |   |
| Increase  in other assets                                                                        |   | (121,815                            | )          | (69,815 | ) |
| Net  cash used in investing activities                                                           |   | $                                   | (1,686,390 | ) | $ | (4,428,584 | ) |
|                                                                                             |   |                                |       |   |   |
| CASH  FLOWS FROM FINANCING ACTIVITIES                                                            |   |                                |       |   |   |
| Net  payments on line of credit                                                                  |   | $                                   | (1,300,000 | ) | $ | (2,500,000 | ) |
| Issuance  of common stock                                                                        |   | 16,250                              |       | — |   |
| Disbursements  for loan costs                                                                    |   | —                              |       | (871,834 | ) |
| Principal  payments on long-term borrowings                                                      |   | (1,055,876                          | )          | (1,045,060 | ) |
| Net  cash used in financing activities                                                           |   | (2,339,626                          | )          | (4,416,894 | ) |
|                                                                                             |   |                                |       |   |   |
| Net  decrease in cash and cash equivalents                                                       |   | (46,983                             | )          | (433,762 | ) |
|                                                                                             |   |                                |       |   |   |
| Cash  and cash equivalents:                                                                      |   |                                |       |   |   |
| Beginning                                                                                        |   | 13,946,736                          |       | 5,624,029 |   |
| Ending                                                                                           |   | $                                   | 13,899,753 |   | $ | 5,190,267 |   |
|                                                                                             |   |                                |       |   |   |
| SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION                                               |   |                                |       |   |   |
| Cash  payments for:                                                                              |   |                                |       |   |   |
| Interest                                                                                         |   | $                                   | 721,748    |   | $ | 1,388,394 |   |
| Income  taxes                                                                                    |   | $                                   | 10,810     |   | $ | 125,216 |   |

 

See Notes toConsolidated Financial Statements.

 

4

----

 

TODHUNTER INTERNATIONAL, INC.

 

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS

(Unaudited)

 

Note 1.   Basis of Presentation

 

The consolidated financialstatements included herein have been prepared by the Company, without audit,pursuant to the rules and regulations of the Securities and ExchangeCommission.  Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof America have been condensed or omitted pursuant to such rules andregulations.  In the opinion ofmanagement, all adjustments, consisting only of normal recurring adjustments,except for the retirement of the chief executive officer (see note 7),necessary for a fair presentation of the financial information for the periodsindicated have been included.  Forfurther information regarding the Company’s accounting policies, refer to the consolidatedfinancial statements and related notes included in the Company’s Annual Reporton Form 10-K for the year ended September 30, 2002.

 

Note 2.   Inventories

 

The major components ofinventories are:

 
|                        |   | **December 31, 2002** |       | **September 30, 2002** |   |
|-----------------------------|--------|-----------------------|------------|------------------------|--------|
|                        |   | **(Unaudited)**       |       |                   |   |
|                        |   |                  |       |                   |   |
| Finished  goods             |   | $                     | 14,764,987 |                   | $      | 16,470,057 |   |
| Work  in process            |   | 1,357,210             |       | 1,513,786              |   |
| Raw  materials and supplies |   | 10,926,440            |       | 9,871,082              |   |
|                        |   |                  |       |                   |   |
|                        |   | $                     | 27,048,637 |                   | $      | 27,854,925 |   |

 

5

----

 

Note 3.   Financing Arrangements

 

Long-term debt consists ofthe following as of December 31, 2002:

 
| Term loans under a credit agreement (i)  (ii), interest payable monthly based on either the Eurodollar or prime rate  at the Company’s option, plus an applicable margin as defined in the  agreement.  The interest rate at  December 31, 2002 was 4.38%.  Future  minimum quarterly principal installments of $ 1,000,000 through September 30,  2006 with any remaining balance due September 30, 2006. |   | $ 35,000,000 |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                      |   |         |   |
| Revolving loans under a credit agreement  (i), interest payable quarterly based on either the Eurodollar or prime rate  at the Company’s option, plus an applicable margin as defined in the  agreement.  The blended interest rate  at December 31, 2002 was 4.67%.  The  revolving lines of credit terminate in October 2004.                                                                            |   | 19,200,000   |
|                                                                                                                                                                                                                                                                                                                                                                                                                      |   |         |
| Other                                                                                                                                                                                                                                                                                                                                                                                                                     |   | 461,133      |
|                                                                                                                                                                                                                                                                                                                                                                                                                      |   | 54,661,133   |
| Less current  maturities                                                                                                                                                                                                                                                                                                                                                                                                  |   | 4,000,000    |
|                                                                                                                                                                                                                                                                                                                                                                                                                      |   | $            | 50,661,133 |
|                                                                                                                                                                                                                                                                                                                                                                                                                           |        |              |  |  |

 

----

(i)                  InOctober 2001, the Company entered into a $70 million credit agreement, whichconsists of a $40 million term loan and a $30 million revolving loanfacility.  The credit agreement iscollateralized principally by all assets located in the United States ofAmerica.  The Company is restricted frompaying dividends to stockholders.  Also,the Company is required to maintain unencumbered cash or marketable securitiesof $4 million at the end of each fiscal quarter and to maintain a minimum fixedcharge and interest coverage ratio, among other financial covenants.

 

(ii)               In addition to quarterly principal payments,the Company may be required to make additional principal payments based on results of the Company’s domesticoperating profits, as defined in the agreement.

 

As of December 31, 2002, theCompany was not in compliance with the funded debt to EBITDA (earnings beforeinterest, taxes, depreciation and amortization) ratio financial covenant underits credit agreement.  The Company hasreceived a waiver under the credit agreement through March 30, 2003, while theCompany negotiates with the bank group to modify the financial covenant.

 

6

----

 

Note 4.   Earnings (Loss) Per Common Share

 

Basic earnings per commonshare are calculated by dividing net income by the average common sharesoutstanding.  On a diluted basis, sharesoutstanding are adjusted to assume the exercise of stock options.  The effect of stock options have not beenincluded in three months ended December 31, 2002 loss per common share, astheir effect would have been anti-dilutive.

 
|                                                                                                  |   | **Three Months Ended  December 31,** |       |
|-------------------------------------------------------------------------------------------------------|--------|--------------------------------------|------------|
|                                                                                                  |   | **2002**                             |       | **2001** |   |
|                                                                                                  |   |                                 |       |   |   |
| Net  income (loss)                                                                                    |   | $                                    | (1,492,456 | ) | $ | 1,490,123 |   |
| Determination  of shares:                                                                             |   |                                 |       |   |   |
| Weighted average number of common shares  outstanding                                                 |   | 5,571,125                            |       | 5,513,734 |   |
| Shares  issuable on exercise of stock options, net of shares assumed to be purchased  out of proceeds |   | 95,889                               |       | 37,936 |   |
| Average  common shares outstanding for diluted earnings per share computation                         |   | 5,667,014                            |       | 5,551,670 |   |
|                                                                                                  |   |                                 |       |   |   |
| Earnings (loss) per common share:                                                                     |   |                                 |       |   |   |
| Basic                                                                                                 |   | $                                    | (0.27      | ) | $ | 0.27 |   |
| Diluted                                                                                               |   | $                                    | (0.27      | ) | $ | 0.27 |   |

 

The Company’s Virgin Islandssubsidiary, through the Economic Development Commission of the Government ofthe Virgin Islands of the United States, has received a 90% exemption fromincome taxes on operating income.  Thisexemption is effective through September 2020. The per share effect of this exemption on earnings (on both a basic anddiluted basis) was to increase earnings per share by $0.03 for the three monthsended December 31, 2002 and 2001.

 

Note 5.   Segment and Geographical Information

 

The Companyoperates primarily in the beverage alcohol industry in the United States.  The Company reports its operating results infour segments:

 

Bulk Alcohol Products (citrus brandy, citrus spirits, rum, canespirits, fortified citrus wine, purchased distilled products and byproducts)

Premium Branded Spirits (primarily Cruzan Estate Rums and CruzanFlavored Rums)

Bottling Operations (contract bottling services and proprietary andprivate label products)

Vinegar and Cooking Wine (bulk vinegar, bulk cooking wine, vinegarstock and proprietary and private label case goods)

 

The accounting policies of thereportable segments are the same as those referred to in Note 1 to theConsolidated Financial Statements.  TheCompany evaluates the performance of its operating segments based on incomebefore income taxes, equity in income or loss of equity investees, interestincome and interest expense. Material intersegment sales and transfers havebeen eliminated.

 

7

----

 

Summarized financialinformation concerning the Company’s reportable segments is shown in thefollowing table.

 

Net sales, operating income(loss), depreciation and amortization and capital expenditures for theCompany’s reportable segments for the three months ended December 31, 2002 and2001, and identifiable assets as of December 31, 2002 and 2001, were asfollows:

 
|                              |   | **Three Months Ended  December 31,** |    |
|-----------------------------------|--------|--------------------------------------|---------|
|                              |   | **2002**                             |    | **2001** |   |
|                              |   | **(in  thousands)**                  |    |
| **Net Sales**                     |   |                                 |    |   |   |
| Bulk Alcohol Products             |   | $                                    | 8,695   |   | $ | 8,836 |   |
| Premium Branded Spirits           |   | 4,204                                |    | 4,773 |   |
| Bottling Operations               |   | 2,829                                |    | 4,782 |   |
| Vinegar and Cooking Wine          |   | 5,236                                |    | 5,463 |   |
|                              |   | $                                    | 20,964  |   | $ | 23,854 |   |
|                              |   |                                 |    |   |   |
| **Operating Income (Loss)**       |   |                                 |    |   |   |
| Bulk Alcohol Products             |   | $                                    | 2,097   |   | $ | 2,889 |   |
| Premium Branded Spirits           |   | (413                                 | )       | (171 | ) |
| Bottling Operations               |   | (1,282                               | )       | 182 |   |
| Vinegar and Cooking Wine          |   | 1,172                                |    | 1,147 |   |
| Corporate Operations and Other    |   | (1,499                               | )       | (1,561 | ) |
|                              |   | $                                    | 75      |   | $ | 2,486 |   |
| **Depreciation and Amortization** |   |                                 |    |   |   |
| Bulk Alcohol Products             |   | $                                    | 809     |   | $ | 706 |   |
| Premium Branded Spirits           |   | 25                                   |    | 36 |   |
| Bottling Operations               |   | 298                                  |    | 398 |   |
| Vinegar and Cooking Wine          |   | 122                                  |    | 117 |   |
| Corporate Operations and Other    |   | 104                                  |    | 107 |   |
|                              |   | $                                    | 1,358   |   | $ | 1,364 |   |
|                              |   |                                 |    |   |   |
| **Capital Expenditures**          |   |                                 |    |   |   |
| Bulk Alcohol Products             |   | $                                    | 758     |   | $ | 1,932 |   |
| Premium Branded Spirits           |   | 16                                   |    | 9 |   |
| Bottling Operations               |   | 631                                  |    | 140 |   |
| Vinegar and Cooking Wine          |   | 11                                   |    | 17 |   |
| Corporate Operations and Other    |   | 11                                   |    | 76 |   |
|                              |   | $                                    | 1,427   |   | $ | 2,174 |   |
|                              |   |                                 |    |   |   |
| **Identifiable Assets**           |   |                                 |    |   |   |
| Bulk Alcohol Products             |   | $                                    | 70,711  |   | $ | 68,937 |   |
| Premium Branded Spirits           |   | 6,535                                |    | 7,594 |   |
| Bottling Operations               |   | 23,403                               |    | 23,206 |   |
| Vinegar and Cooking Wine          |   | 19,841                               |    | 20,569 |   |
| Corporate Operations and Other    |   | 13,508                               |    | 10,082 |   |
|                              |   | $                                    | 133,998 |   | $ | 130,388 |   |

 

8

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Sales and operating income forthe three months ended December 31, 2002 and 2001 and identifiable assets as ofDecember 31, 2002 and 2001, classified by geographic area, were as follows:

 
| **Three Months Ended** |   | **United  States** |   | **U. S.  Virgin  Islands and  the Bahamas** |   | **Consolidated** |       |
|------------------------|--------|--------------------|--------|---------------------------------------------|--------|------------------|------------|
|                   |   |               |   | **(in  thousands)**                         |   |             |       |
|                   |   |               |   |                                        |   |             |       |
| December 31, 2002      |   |               |   |                                        |   |             |       |
| Net sales              |   | $                  | 18,660 |                                        | $      | 2,304            |       | $ | 20,964 |   |
| Operating Income       |   | (363               | )      | 438                                         |   | 75               |       |
| Identifiable assets    |   | 91,132             |   | 42,866                                      |   | 133,998          |       |
|                   |   |               |   |                                        |   |             |       |
| December 31, 2001:     |   |               |   |                                        |   |             |       |
| Net sales              |   | $                  | 21,924 | ** **                                  | $      | 1,930            | ** ** | $ | 23,854 | ** ** |
| Operating income       |   | 2,136              |   | 350                                         |   | 2,486            |       |
| Identifiable assets    |   | 90,137             |   | 40,251                                      |   | 130,388          |       |

 

Included in net sales for theUnited States are export sales, primarily to Europe, Canada and the Caribbean,totaling approximately $1,918,000 and $3,116,000 for the three months endedDecember 31, 2002 and 2001, respectively.

 

Note 6.   Comprehensive income (loss)

 

Comprehensive income (loss) isthe total of net income (loss) and other changes in equity. Total comprehensiveincome (loss) for the three months ended December 31, 2002 and 2001 was asfollows:

 
|                                                      |   | **Three Months Ended  December 31,** |   |
|-----------------------------------------------------------|--------|--------------------------------------|--------|
|                                                      |   | **2002**                             |   | **2001** |   |
|                                                      |   | **(in  thousands)**                  |   |
|                                                      |   | $                                    |   |
| Net income (loss)                                         |   | $                                    | (1,492 | ) | 1,490 |   |
| Other comprehensive income, interest rate  cap adjustment |   | —                               |   | 51 |   |
|                                                      |   | $                                    | (1,492 | ) | 1,541 |   |

 

Note 7.  Retirement of Chairman and Chief ExecutiveOfficer

 

On November 26, 2002, theCompany announced the retirement and resignation of A. Kenneth Pincourt, Jr.,its Founder, Chairman and Chief Executive Officer.  The Company has entered into a retirement agreement with Mr.Pincourt, setting forth the terms of his retirement and resignation.  The retirement agreement replaces Mr.Pincourt’s previous employment agreement. Under the retirement agreement, theCompany elected to accelerate retirement benefits under its deferredcompensation program and to continue to pay compensation and provide relatedbenefits through July 15, 2004, the remaining term of Mr. Pincourt’s previousemployment contract.

 

Accelerated benefits under thedeferred program amounted to $1,040,987, of which $549,220 had been accrued asof September 30, 2002. Mr. Pincourt’s deferred compensation was paid to him onDecember 13, 2002.  Also under theretirement agreement, Mr. Pincourt will continue to receive monthly payments of$41,004 through July 15, 2004, one bonus payment of $150,491 payable on orbefore October 31, 2003, and a second bonus payment of $119,138 payable on orbefore August 31, 2004.  Among otherbenefits, Mr. Pincourt is also able to participate in any health

 

9

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insurance plan, employeebenefit plan or other arrangement made available by the Company or itssubsidiaries to its executives and key management employees, through July 15,2004.  The Company recorded a charge forthe retirement of Mr. Pincourt during the first quarter of fiscal 2003.  The effect of this charge was included inother expense in the Company’s consolidated statement of income and amounted to$1,503,925 before income taxes.

 

The following table summarizesthe charge made during the first quarter for Mr. Pincourt’s retirement:

 
| Deferred compensation                                         |   | $         | 1,040,987 |   |
|---------------------------------------------------------------|--------|-----------|-----------|--------|
| Compensation and related  benefits                            |   | 1,012,158 |      |
| Total                                                         |   | 2,053,145 |      |
|                                                          |   |      |      |
| Less deferred compensation  accrued as of September  30, 2002 |   | (549,220  | )         |
| Charged to expense                                            |   | $         | 1,503,925 |   |

 

10

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**Item2.    Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

**Forward-Looking Statements**

 

Management’s Discussion and Analysis contains “Forward-LookingStatements,” as defined in section 27a of the Securities Act of 1933, asamended, and Section 21e of the Securities Exchange Act of 1934, asamended.  Forward-Looking Statements arestatements other than historical information or statements of current conditionand relate to future events or the future financial  performance of the Company. Some Forward-Looking Statements may be identified by use of such termsas “believes,” “anticipates,” “intends” or “expects.”  Such Forward-Looking Statements involve known and unknown risks,uncertainties and other factors that may cause the actual results, performanceor achievements of the Company to be materially different from any futureresults, performance or achievements expressed or implied by suchForward-Looking Statements.  Thefollowing is a list of factors, among others, that could cause actual resultsto differ materially from those contemplated by the Forward-LookingStatements:  business conditions andfluctuations in certain market segments and industries and the general economy;competitive factors, including increased competition and price pressures;availability of third-party component products at reasonable prices; increasedexcise taxes; foreign currency exposure; changes in product mix between andamong product lines; lower than expected customer orders and quarterly seasonalfluctuations of those orders; and product shipment interruptions.  The Company undertakes no obligation toupdate or revise any Forward-Looking Statements, whether as a result of newinformation, future events or otherwise.

 

**Introduction**

 

The following discussion and analysis summarizes the significantfactors affecting (i) consolidated results of operations of the Company for thethree months ended December 31, 2002 compared to the three months endedDecember 31, 2001, and (ii) financial liquidity and capital resources.  This discussion and analysis should be readin conjunction with the Company’s consolidated financial statements and notesthereto included herein.  Certainamounts presented in this Item 2 have been rounded to the nearest thousand orhundred thousand, as applicable, but the percentages calculated are based onactual amounts without rounding.

 

The Company operates primarily in the beverage alcohol industry in theUnited States.       The Company is a leading producer and supplier of brandy, rum,wine and spirits to other beverage alcohol manufacturers; produces, imports andmarkets premium branded spirits; bottles beverage alcohol and other beverageson a contract basis and under its own labels; and produces vinegar and cookingwine.  The Company reports its operatingresults in five segments:  Bulk AlcoholProducts (citrus brandy, citrus spirits, rum, cane spirits, fortified citruswine, purchased distilled products and byproducts); Premium Branded Spirits(primarily Cruzan Estate Rums and Cruzan Flavored Rums); Bottling Operations(contract bottling services and proprietary and private label products);Vinegar and Cooking Wine (bulk vinegar, bulk cooking wine, vinegar stock andproprietary and private label case goods); and Corporate Operations and Other(primarily corporate related items).

 

Information regarding the net sales, operating income and total assetsof each of the Company’s business segments and information regarding geographicareas is set forth in Note 5 to the Consolidated Financial Statements.

 

The Company’s net sales and gross margins (gross profit as a percentageof net sales) vary depending on the mix of business among the Company’sproducts.  Historically, gross marginshave been highest in bulk alcohol products and premium branded spirits andlower in bottling operations and vinegar and cooking wine operations.

 

The Company has a limited number of customers, and these customersoften purchase bulk alcohol products in significant quantities or placesignificant orders for contract bottling services, distilled spirits, vinegarand cooking wine.  Accordingly, the sizeand timing of purchase orders and product shipments can cause operating resultsto fluctuate significantly from quarter to quarter.  Additionally, some Company products generate higher profitmargins than others, and changes in the Company’s product mix can cause grossmargins to fluctuate.  Certain aspectsof the Company’s business are seasonal, with increased demand for the Company’scontract bottling services from April to October and increased production ofthe Company’s bulk alcohol products from November to June,

 

11

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correspondingto the Florida citrus harvest.  As aresult of these factors, the Company’s operating results may vary significantlyfrom quarter to quarter.

 

Net sales represent the Company’s gross sales less excise taxes. Excisetaxes are generally payable on products bottled by the Company.  In addition, excise taxes are payable onsales of industrial alcohol to certain customers.  Accordingly, excise taxes vary from period to period dependingupon the Company’s product and customer mix.

 

**Results ofOperations**

 

The following table sets forth statement of income items as apercentage of net sales.

 
|                                         |   | **Three Months Ended****December 31****,** |   |
|----------------------------------------------|--------|--------------------------------------------|--------|
|                                         |   | **2002**                                   |   | **2001** |   |
| Net sales                                    |   | 100.0                                      | %      | 100.0 |   |
| Cost  of goods sold                          |   | 73.4                                       |   | 68.3 |   |
| Gross  margin                                |   | 26.6                                       |   | 31.7 |   |
| Selling,  general and dministrative expenses |   | 26.2                                       |   | 21.3 |   |
| Operating  income                            |   | 0.4                                        |   | 10.4 |   |
| Interest  expense                            |   | (3.5                                       | )      | (3.3 | ) |
| Other  income (expense), net                 |   | (5.6                                       | )      | 1.4 |   |
| Income  (loss) before income taxes           |   | (8.7                                       | )      | 8.5 |   |
| Income  tax (expense) benefit                |   | 1.6                                        |   | (2.3 | ) |
| Net  income (loss)                           |   | (7.1%                                      | )      | 6.2 |   |

 

The following table providesinformation on net sales of certain Company products.

 
|                      |   | **Three Months Ended  December 31,** |   |     |   |
|---------------------------|--------|--------------------------------------|--------|----------|--------|
|                      |   | **2002**                             |   | **2001** |   | **% Change** |   |
|                      |   | **(in thousands)**                   |   |     |   |
|                      |   |                                 |   |     |   |   |   |
| Bulk Alcohol Products     |   | $                                    | 8,695  |     | $      | 8,836 |   | (1.6 | ) |
| Premium  Branded Spirits  |   | 4,204                                |   | 4,773    |   | (11.9 | ) |
| Bottling  Operations      |   | 2,829                                |   | 4,782    |   | (40.8 | ) |
| Vinegar  and Cooking Wine |   | 5,236                                |   | 5,463    |   | (4.2 | ) |
|                      |   | $                                    | 20,964 |     | $      | 23,854 |   | (12.1 | ) |

 

12

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The following table providesunit sales volume data for certain Company products.

 
|                                 |   | **Three Months  Ended********December 31,** |   |     |   |
|--------------------------------------|--------|---------------------------------------------|--------|----------|--------|
|                                 |   | **2002**                                    |   | **2001** |   | **% Change** |   |
|                                 |   | **(in thousands)**                          |   |     |   |
|                                 |   |                                        |   |     |   |   |   |
| Bulk alcohol products:               |   |                                        |   |     |   |   |   |
| Distilled products, in proof gallons |   |                                        |   |     |   |   |   |
| Citrus Brandy                        |   | 457                                         |   | 363      |   | 25.7 |   |
| Citrus Spirits                       |   | 116                                         |   | 156      |   | (25.4 | ) |
| Rum                                  |   | 948                                         |   | 847      |   | 11.9 |   |
| Cane Spirits                         |   | 125                                         |   | 200      |   | (37.3 | ) |
| Fortified citrus wine, in gallons    |   | 2,543                                       |   | 2,704    |   | (6.0 | ) |
| Premium branded spirits, in cases    |   | 109                                         |   | 89       |   | 22.5 |   |
| Bottling operations, in cases        |   | 543                                         |   | 1,432    |   | (62.1 | ) |
| Vinegar                              |   |                                        |   |     |   |   |   |
| Bulk, in 100 grain gallons           |   | 1,239                                       |   | 1,352    |   | (8.4 | ) |
| Cases                                |   | 154                                         |   | 169      |   | (8.7 | ) |
| Drums, in 100 grain gallons          |   | 385                                         |   | 378      |   | 1.8 |   |
| Cooking Wine                         |   |                                        |   |     |   |   |   |
| Bulk, in gallons                     |   | 1,153                                       |   | 1,067    |   | 8.1 |   |
| Cases                                |   | 184                                         |   | 208      |   | (11.6 | ) |

 

**Threemonths ended December 31, 2002 compared to three months ended December 31, 2001**.  Unless otherwise noted, references to 2002represent the three-month period ended December 31, 2002 and references to 2001represent the three-month period ended December 31, 2001.  In 2001, net sales and cost of goods sold ofpremium branded spirits included excise taxes of approximately $0.6 million,representing excise taxes included in cases sold from warehouses locatedoutside of the Company's Florida bonded warehouse facilities.  Beginning October 1, 2002, the Company nolonger includes excise taxes in net sales and cost of goods sold of premiumbranded spirits case sales from locations outside of the Company's Floridabonded warehouse facilities.  Net salesand cost of sales in 2001 have been reclassified to conform with the 2002presentation.

 

*Net Sales.*Net saleswere $21.0 million in 2002, a decrease of 12.1% from net sales of $23.9 millionin 2001.

 

Net sales ofbulk alcohol products were $8.7 million in 2002, a decrease of 1.6% from netsales of $8.8 million in 2001.  Thedecrease resulted primarily from decreased shipments of citrus spirits, canespirits and fortified citrus wine. Except for fortified citrus wine, management believes that the decreasein bulk alcohol shipments is due to the timing of customer orders and that bulkalcohol shipments will return to normal levels by the end of fiscal 2003.  Due to the loss of certain customers,management believes that its fortified wine volume in fiscal 2003 may declineby approximately 2% from fiscal 2002.

 

Net sales ofpremium branded spirits were $4.2 million in 2002, a decrease of 11.9% from netsales of $4.8 million in 2001.  In 2001,net sales of premium branded spirits included $1.6 million of bulk tequilasales, representing the liquidation of inventory that was held to producePorfidio tequila.  Excluding bulktequila sales, net sales of premium branded spirits were $4.2 million in 2002,an increase of 31.6% from net sales of $3.2 million in 2001.  Sales of the Company’s Cruzan Estate Rumsand Cruzan Flavored Rums, collectively, increased 33.9% and Cruzan FlavoredRums alone increased 47.3% in 2002 compared to 2001.

 

Net sales ofthe Company’s bottling operations were $2.8 million in 2002, a decrease of40.8% from net sales of $4.8 million in 2001. The unit volume of the Company’s bottling operations decreased 62.1% in2002 as a result of the decision of a large bottling customer to shiftproduction from the Company to its own bottling facilities.  During fiscal 2002, this customerrepresented approximately 48% of the Company’s fiscal 2002 unit volume inbottling

 

13

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operations.  Management believes that this loss in volumewill be partially offset by increased business with new and existing customersand that total bottling operations may decline by approximately 8% in fiscal2003.

 

Net sales ofvinegar and cooking wine were $5.2 million in 2002, a decrease of 4.2% from netsales of $5.5 million in 2001. Management believes that the decrease in net sales is due to the timingof customer orders.

 

*Gross Profit.* Grossprofit was $5.6 million in 2002, a decrease of 26.1% from gross profit of $7.6million in 2001.  Gross margin decreasedto 26.6% in 2002 from 31.7% in 2001. The decrease in gross margin was primarily attributable to the decreasedvolume in bottling operations and a decrease in shipments of bulk alcohol.

 

*Selling, General and AdministrativeExpenses. *Selling,general and administrative expenses were $5.5 million in 2002, an increase of8.7% from $5.1 million in 2001.  Theincrease was primarily attributable to increased overhead, marketing andadvertising expenses related to the Company’s premium branded spirits business.  The Company has increased its overhead,marketing and advertising budget in its premium branded spirits business as itcontinues to place emphasis on this growing business segment.

 

*Operating Income.*  The following table sets forth the operatingincome (loss) by reportable segment of the Company for 2002 and 2001.

 
|                           |   | **Three months ended  December 31,** |   |     |   |
|--------------------------------|--------|--------------------------------------|--------|----------|--------|
|                           |   | **2002**                             |   | **2001** |   | **% Change** |   |
|                           |   | **(In thousands)**                   |   |     |   |
| Bulk Alcohol Products          |   | $                                    | 2,097  |     | $      | 2,889 |   | (27.4 | ) |
| Premium Branded Spirits        |   | (413                                 | )      | (171     | )      | — |   |
| Bottling Operations            |   | (1,282                               | )      | 182      |   | — |   |
| Vinegar and Cooking Wine       |   | 1,172                                |   | 1,147    |   | 2.2 |   |
| Corporate Operations and Other |   | (1,499                               | )      | (1,561   | )      | — |   |
|                           |   | $                                    | 75     |     | $      | 2,486 |   | (97.0 | ) |

 

As a result ofthe above factors, operating income was $0.1 million in 2002, a decrease of97.0% from operating income of $2.5 million in 2001.  The 27.4% reduction in operating income for the bulk alcoholsegment is primarily attributable to the timing of shipments of higher marginproducts being delayed into future quarters.

 

The Company’s premium branded spirits segment experienced operatinglosses of $0.4 million in 2002 and $0.2 million in 2001.  The operating loss reflected the Company’scontinuing efforts to increase market share by reinvesting segment grossprofits in selling and marketing expenses. Included in operating loss of premium branded spirits in 2001 was profitof $0.5 million related to bulk tequila sales. Excluding bulk tequila sales, operating loss of premium branded spiritswould have been $0.7 million in 2001.

 

The Company’s bottling operations segment reported an operating loss of$1.3 million in 2002 compared to operating income of $0.2 million in 2001. Theoperating loss reflected the decision of a large bottling customer to shiftproduction from the Company to its own bottling facilities.  This customer represented approximately 48%of the Company’s annual unit volume for fiscal year 2002.  Management believes that this loss in volumewill be partially offset by increased business with new and existing customersand that total bottling operations volume may decline by approximately 8% infiscal 2003.

 

*Interest Expense.*Interestexpense was $0.7 million in 2002 and $0.8 million in 2001.  The decrease in interest expense was due tolower interest rates during 2002 as compared to 2001.

 

*Other Expense*.  On November 26, 2002, the Company announcedthe retirement and resignation of A. Kenneth Pincourt, Jr., its Founder,Chairman and Chief Executive Officer. The Company has entered into a retirement agreement with Mr. Pincourt,setting forth the terms of his retirement and resignation.  The retirement agreement replaces Mr.Pincourt’s previous employment agreement. Under the retirement agreement, theCompany elected to

 

14

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accelerate retirement benefitsunder its deferred compensation program and to continue to pay compensation andprovide related benefits through July 15, 2004, the remaining term of Mr.Pincourt’s previous employment contract.

 

Acceleratedbenefits under the deferred program amounted to $1,040,987, of which $549,220had been accrued as of September 30, 2002. Mr. Pincourt’s deferred compensationwas paid to him on December 13, 2002. Also under the retirement agreement, Mr. Pincourt will continue toreceive monthly payments of $41,004 through July 15, 2004, one bonus payment of$150,491 payable on or before October 31, 2003, and a second bonus payment of$119,138 payable on or before August 31, 2004. Among other benefits, Mr. Pincourt is also able to participate in anyhealth insurance plan, employee benefit plan or other arrangement madeavailable by the Company or its subsidiaries to its executives and keymanagement employees, through July 15, 2004. The Company recorded a charge for the retirement of Mr. Pincourt duringthe first quarter of fiscal 2003.  Theeffect of this charge was included in other expense in the Company’sconsolidated statement of income and amounted to $1,503,925 before incometaxes.

 

The followingtable summarizes the charge made during the first quarter for Mr. Pincourt’sretirement:

 
| Deferred compensation                                         |   | $         | 1,040,987 |   |
|---------------------------------------------------------------|--------|-----------|-----------|--------|
| Compensation and related  benefits                            |   | 1,012,158 |      |
| Total                                                         |   | 2,053,145 |      |
|                                                          |   |      |      |
| Less deferred compensation  accrued as of September  30, 2002 |   | (549,220  | )         |
| Charged to expense                                            |   | $         | 1,503,925 |   |

 

*Income Tax Expense.*TheCompany’s effective income tax rate was 18.0% in 2002 and 26.6% in 2001.  The low tax rate was attributable to a 90%exemption of the Company’s Virgin Islands subsidiary from U.S. Virgin Islandsincome taxes.  The exemption iseffective through September 2020.  Inaddition, the Company benefited from the extraterritorial income exclusion in2002 and 2001.  During 2002, the Companyincurred operating losses from its U.S. operations and recorded an income taxbenefit of $0.3 million.

 

**FinancialLiquidity and Capital Resources**

 

**General**

 

The Company’sprincipal use of cash in its operating activities is for purchasing rawmaterials to be used in its manufacturing operations, purchasing importedproducts for its premium branded spirits business and carrying inventories andreceivables.  The Company’s source ofliquidity has historically been cash flow from operations and its line ofcredit.  Some of the Company’smanufacturing operations are seasonal and the Company’s borrowings on its lineof credit vary during the year.  Forexample, the Company uses citrus molasses as its primary raw material in theproduction of citrus brandy and spirits at its two Florida distilleries.  The Company buys citrus molasses, abyproduct of citrus juice production, from local manufacturers of citrus juiceand concentrate during the citrus harvest, which generally runs from Novemberto June.  The Company generally beginspurchasing citrus molasses in November and manufactures and builds inventory ofcitrus brandy and spirits.  The Companymanufactures and builds inventory while raw materials are available due to theshort life of the citrus molasses it purchases.  Another seasonal business of the Company is its contract bottlingservices.  Demand for contract bottlingservices is highest during the months from April through October.  Management believes that cash provided byits operating and financing activities will provide adequate resources tosatisfy its working capital, liquidity and anticipated capital expenditurerequirements for both its short-term and long-term capital needs.

 

**Operating Activities**

 

Net cashprovided by operating activities in 2002 was $4.0 million, which resulted from$0.3 million in net losses adjusted for noncash items, and $4.3 millionrepresenting the net change in operating assets and liabilities.

 

15

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**Investing and Financing Activities**

 

Net cash usedin investing activities in 2002 was $1.7 million, which resulted primarily from$1.4 million of capital expenditures.

 

Net cash usedin financing activities in 2002 was $2.3 million, which resulted from paymentsof $1.3 million under the revolving credit facility and $1.0 million oflong-term debt.

 

The Company’srevolving credit facility provides for maximum borrowings of $30 million.  Borrowings under this facility were $19.2million at December 31, 2002 (see Note 3 to the consolidated financialstatements).

 

The Company’s bank debt was $54.2 million as of December 31, 2002, andits ratio of total debt to equity was 1.04 to 1.

 

Asof December 31, 2002, the Company was not in compliance with the funded debt toEBITDA (earnings before interest, taxes, depreciation and amortization) ratiofinancial covenant under its credit agreement. The Company has received a waiver under the credit agreement throughMarch 30, 2003, while the Company negotiates with the bank group to modify thefinancial covenant.

 

The Company’s share of the undistributed earnings of the Bahamian andVirgin Islands subsidiaries was approximately $7.5 million and $27.9 million,respectively, as of September 30, 2002. See Note 10 to the Company’s consolidated financial statements includedin the Company’s Annual Report on Form 10-K for the year ended September 30,2002 for additional information on income taxes related to these subsidiaries.

 

Based on current plans and business conditions, management expects thatits cash, cash equivalents, and short-term investments, together with anyamounts generated from operations and available borrowings, will be sufficientto meet the Company’s cash requirements for at least the next 12 months.

 

**Effects of Inflation and Changing Prices**

 

The Company’s results of operations and financial condition have notbeen significantly affected by inflation and changing prices.  The Company has been able, subject to normalcompetitive conditions, to pass along rising costs through increased sellingprices.

 

**Critical Accounting Policies**

 

The Company’s significant accounting policies are more fully describedin Note 1 to the Company’s consolidated financial statements located in Item 8of its Annual Report on Form 10-K. The preparation of financial statements inconformity with accounting principles generally accepted in the United States ofAmerica requires management to make estimates and assumptions that affect thereported amounts of assets, liabilities, revenues, and expenses, and therelated disclosures of contingent assets and liabilities. Actual results coulddiffer from those estimates under different assumptions or conditions. TheCompany believes that the following critical accounting policy is subject toestimates and judgments used in the preparation of its consolidated financialstatements:

 

The Company has goodwill and intangible assets associated with businessacquisitions. The Company reviews these assets for impairment annually andwhenever an event occurs or circumstances change that would more likely thannot reduce the fair value of these assets below their carrying value.  If the fair value of these assets is lessthan their carrying value, then an impairment loss would be recognized equal tothe excess of the carrying value over the fair value of the asset.

 

**Item 3.    Quantitativeand Qualitative Disclosures about Market Risk**

 

The information required under this Item 3 is incorporated herein byreference to the Company’s Annual Report on Form 10-K for the year endedSeptember 30, 2002.

 

16

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**Item4.    Controls and Procedures**

 

**Evaluationof Disclosure Controls and Procedures**

 

Within 90 daysprior to the date of this report, management, including the Company’s ChiefExecutive Officer and Chief Financial Officer, carried out an evaluation of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures.  Based on thisevaluation, the Company’s Chief Executive Officer and Chief Financial Officerconcluded that the disclosure controls and procedures are effective in timelyalerting them to material information required to be included in the Company’speriodic SEC reports.  It should benoted that the design of any system of controls is based in part upon certainassumptions about the likelihood of future events, and there can be noassurance that any design will succeed in achieving its stated goals under allpotential future conditions, regardless of how remote.

 

**Changesin Internal Controls**

 

In addition,management, including the Company’s Chief Executive Officer and Chief FinancialOfficer, reviewed the Company’s internal controls, and there have been nosignificant changes in the internal controls or in other factors that couldsignificantly affect those controls subsequent to the date of their lastevaluation.

 

**PART II. OTHER INFORMATION**

 

**Item6.  Exhibits and Reports on Form 8-K**

 
| 3.1     | Amended and  Restated Certificate of Incorporation of Todhunter International, Inc.   (1)                                                                                                                   |
|---------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.2     | Amended and  Restated By-Laws of Todhunter International, Inc.  (5)                                                                                                                                         |
| 4.1     | Form of  Todhunter International, Inc. Common Stock Certificate (1)                                                                                                                                              |
| 10.6    | Todhunter  International, Inc. 1992 Stock Option Plan, as amended  (3)                                                                                                                                      |
| 10.8    | Lease, dated  March 24, 1988, as amended, between Todhunter International, Inc. and  Especially West Palm Beach, Inc.  (1)                                                                             |
| 10.8(a) | Amendment to  Lease, dated January 1, 1997, between Todhunter International, Inc. and  Florida Acquisition Fund Esperante, Ltd. (4)                                                                              |
| 10.18   | Executive  Employment Agreement dated as of July 15, 1999, between Thomas A. Valdes and  Todhunter International, Inc. (5)                                                                                       |
| 10.19   | Executive  Employment Agreement dated as of July 15, 1999, between Jay S. Maltby and  Todhunter International, Inc. (5)                                                                                          |
| 10.21   | Executive  Employment Agreement dated as of July 15, 1999, between D. Chris Mitchell and  Todhunter International, Inc. (5)                                                                                      |
| 10.22   | Amended and  Restated Credit Agreement dated as of October 19, 2001, by and among  Todhunter International, Inc., and each of the Financial Institutions  Initially a Signatory thereto, and SouthTrust Bank (6) |
| 10.23   | Agreement  and General Release of All Claims between Todhunter International, Inc. and  A. Kenneth Pincourt, Jr., dated as of November 26, 2002 (7)                                                              |
| 11.1    | Statement of  Computation of Per Share Earnings (8)                                                                                                                                                              |
| 21.1    | Subsidiaries  of Todhunter International, Inc. (2)                                                                                                                                                               |
| 99.1    | Certification  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 (9)                                                                                     |
| 99.2    | Certification  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 (9)                                                                                     |

 

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| (1)    | Incorporated  herein by reference to the Company’s Registration Statement on Form S-1  (File No.  33-50848).          |
|--------|--------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                 |
| (2)    | Incorporated  herein by reference to the Company’s Annual Report on Form 10-K for the  year ended September 30, 1995. |

 

17

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| (3)    | Incorporated  herein by reference to the Company’s Annual Report on Form 10-K for the year  ended September 30, 1997.                                                                                                      |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                            |
| (4)    | Incorporated  herein by reference to the Company’s Annual Report on Form 10-K for the year  ended September 30, 1998.                                                                                                      |
|   |                                                                                                                                                                                                                            |
| (5)    | Incorporated  herein by reference to the Company’s Annual Report on Form 10-K for the year  ended September 30, 1999.                                                                                                      |
|   |                                                                                                                                                                                                                            |
| (6)    | Incorporated  herein by reference to the Company’s Annual Report on Form 10-K for the year  ended September 30, 2001.                                                                                                      |
|   |                                                                                                                                                                                                                            |
| (7)    | Incorporated  herein by reference to the Company’s Report on Form 8-K for November 26,  2002.                                                                                                                              |
|   |                                                                                                                                                                                                                            |
| (8)    | Filed  herewith and incorporated herein by reference to Note 4 of notes to  consolidated financial statements, included in Item 1 of the Company’s  Quarterly Report on Form 10-Q for the quarter ended December 31, 2002. |
|   |                                                                                                                                                                                                                            |
| (9)    | Filed  herewith.                                                                                                                                                                                                                |

 

**(b)****          Reports on Form 8-K**

 

During thefirst quarter of fiscal 2003, the Company filed the following current report onForm 8-K:

 

(1)          Form8-K dated November 26, 2002.   This Form8-K reported information under Item 5 (Other Events and required FDDisclosure).

 

18

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**Signatures**

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
| Date:  February 11, 2003 |   | /s/ Jay S.  Maltby                                 |   |
|--------------------------|--------|----------------------------------------------------|--------|
|                     |   | Jay S.  Maltby                                     |
|                     |   | Chairman,  Chief Executive Officer and President   |
|                     |   |                                               |
|                     |   |                                               |
| Date:  February 11, 2003 |   | /s/ Troy  Edwards                                  |   |
|                     |   | Troy Edwards                                       |
|                     |   | Chief  Financial Officer, Treasurer and Controller |

 

19

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CERTIFICATION REQUIRED BY THE

CHIEF EXECUTIVE OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Jay S. Maltby, certify that:

 
| 1.     | I have  reviewed this quarterly report on Form 10-Q of Todhunter International, Inc.;                                                                                                                                                                                                                                                                                                               |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 2.     | Based on my  knowledge, this quarterly report does not contain any untrue statement of a  material fact or omit to state a material fact necessary to make the  statements made, in light of the circumstances under which such statements  were made, not misleading with respect to the period covered by this  quarterly report;                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 3.     | Based on my  knowledge, the financial statements, and other financial information included  in this quarterly report, fairly present in all material respects the  financial condition, results of operations and cash flows of the registrant  as of, and for, the periods presented in this quarterly report;                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.     | The  registrant’s other certifying officers and I are responsible for establishing  and maintaining disclosure controls and procedures (as defined in Exchange  Act Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |
|   | a)                                                                                                                                                                                                                                                                                                                                                                                                  | designed  such disclosure controls and procedures to ensure that material information  relating to the registrant, including its consolidated subsidiaries, is made  known to us by others within those entities, particularly during the period  in which this quarterly report is being prepared; |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |   |
|   | b)                                                                                                                                                                                                                                                                                                                                                                                                  | evaluated  the effectiveness of the registrant’s disclosure controls and procedures as  of a date within 90 days prior to the filing date of this quarterly report  (the “Evaluation Date”); and |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |   |
|   | c)                                                                                                                                                                                                                                                                                                                                                                                                  | presented in  this quarterly report our conclusions about the effectiveness of the  disclosure controls and procedures based on our evaluation as of the  Evaluation Date; |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 5.     | The  registrant’s other certifying officers and I have disclosed, based on our  most recent evaluation, to the registrant’s auditors and the audit committee  of registrant’s board of directors (or persons performing the equivalent  function):                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |
|   | a)                                                                                                                                                                                                                                                                                                                                                                                                  | all  significant deficiencies in the design or operation of internal controls  which could adversely affect the registrant’s ability to record, process,  summarize and report financial data and have identified for the registrant’s  auditors any material weaknesses in internal controls; and |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |   |
|   | b)                                                                                                                                                                                                                                                                                                                                                                                                  | any fraud,  whether or not material, that involves management or other employees who have  a significant role in the registrant’s internal controls; and |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 6.     | The registrant’s  other certifying officers and I have indicated in this quarterly report  whether or not there were significant changes in internal controls or in  other factors that could significantly affect internal controls subsequent to  the date of our most recent evaluation, including any corrective actions with  regard to significant deficiencies and material weaknesses. |

 
| Date:  February 11, 2003 |   |                                             |
|-------------------------------|--------|--------------------------------------------------|
|                          |   |                                             |
|                          |   |    /s/ Jay S. Maltby                   |   |
|                          |   | Jay S.  Maltby                                   |
|                          |   | Chairman,  Chief Executive Officer and President |

 

20

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CERTIFICATION REQUIRED BY THE

CHIEF FINANCIAL OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Troy Edwards, certify that:

 
| 1.     | I have  reviewed this quarterly report on Form 10-Q of Todhunter International, Inc.;                                                                                                                                                                                                                                                                                                               |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 2.     | Based on my  knowledge, this quarterly report does not contain any untrue statement of a  material fact or omit to state a material fact necessary to make the  statements made, in light of the circumstances under which such statements were  made, not misleading with respect to the period covered by this quarterly  report;                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 3.     | Based on my  knowledge, the financial statements, and other financial information included  in this quarterly report, fairly present in all material respects the financial  condition, results of operations and cash flows of the registrant as of, and  for, the periods presented in this quarterly report;                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.     | The  registrant’s other certifying officers and I are responsible for establishing  and maintaining disclosure controls and procedures (as defined in Exchange  Act Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |
|   | a)                                                                                                                                                                                                                                                                                                                                                                                                  | designed  such disclosure controls and procedures to ensure that material information  relating to the registrant, including its consolidated subsidiaries, is made  known to us by others within those entities, particularly during the period  in which this quarterly report is being prepared; |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |   |
|   | b)                                                                                                                                                                                                                                                                                                                                                                                                  | evaluated  the effectiveness of the registrant’s disclosure controls and procedures as  of a date within 90 days prior to the filing date of this quarterly report  (the “Evaluation Date”); and |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |   |
|   | c)                                                                                                                                                                                                                                                                                                                                                                                                  | presented in  this quarterly report our conclusions about the effectiveness of the  disclosure controls and procedures based on our evaluation as of the Evaluation  Date; |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 5.     | The  registrant’s other certifying officers and I have disclosed, based on our  most recent evaluation, to the registrant’s auditors and the audit committee  of registrant’s board of directors (or persons performing the equivalent  function):                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |
|   | a)                                                                                                                                                                                                                                                                                                                                                                                                  | all  significant deficiencies in the design or operation of internal controls  which could adversely affect the registrant’s ability to record, process,  summarize and report financial data and have identified for the registrant’s  auditors any material weaknesses in internal controls; and |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |   |
|   | b)                                                                                                                                                                                                                                                                                                                                                                                                  | any fraud,  whether or not material, that involves management or other employees who have  a significant role in the registrant’s internal controls; and |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 6.     | The  registrant’s other certifying officers and I have indicated in this quarterly  report whether or not there were significant changes in internal controls or  in other factors that could significantly affect internal controls subsequent  to the date of our most recent evaluation, including any corrective actions  with regard to significant deficiencies and material weaknesses. |

 

 
| Date:  February 11, 2003 |   |                                               |
|-------------------------------|--------|----------------------------------------------------|
|                          |   |                                               |
|                          |   |    /s/   Troy Edwards               |   |
|                          |   | Troy Edwards                                       |
|                          |   | Chief  Financial Officer, Treasurer and Controller |

 

21

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